Banks and building societies continue to cut rates as mortgage price war hots up.
Several mortgage lenders have declared that they’re offering their “cheapest ever deals” with one lender or another cutting rates almost every day.
The deals on offer are well below market norms. For example, borrowers can fix at under 2% for two years with several lenders, or for five years at under 3%.
We’ve looked at why fixed rates are so popular – and so cheap.
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Fixed rates are falling
Fixed rates have fallen dramatically over the past few months. Analysis by Moneyfacts shows the average two-year fixed rate has dropped by 0.25% in the past two months alone, now standing at 3.27% compared to 3.52% in August.
However despite fixed rates being more competitive than ever before, figures from the Council of Mortgage Lenders show that more than two-thirds (67%) of today's mortgages are on standard variable rates (SVR).
SVRs are also at all-time lows as they tend to move in line with the base rate, which has been at 0.5% since March 2009.
Most borrowers on SVRs can switch penalty-free at any time, which means a large portion of the market could change mortgage provider at any time. This, and the fact the base rate seems set to remain at 0.5% for the time being, means lenders are keen to hang onto existing customers and attract new ones. To do this they offer cheap rates.
Why are variable rates falling out of favour?
Variable rates were great when the base rate was falling. The latter part of 2008 and beginning of 2009 saw constant rate cuts.
Borrowers who predicted this, and took out a tracker mortgage at the right time, enjoyed falling payments each month.
But rates aren’t going to fall any further. The next rate move is upwards so trackers and variable rates for new customers are losing their appeal. If you took a variable rate mortgage now you’d live in fear of the base rate, and therefore your payments, rising.
While the latest predictions for a base rate rise suggest it may not be until after the General Election in May, rising payments are still a very real worry for borrowers on variable rate deals. Not just the first rate rise, but the second and third too.
Customers with fixed rate mortgages, on the other hand, don’t have to worry about rising rate. Their payments are fixed and that’s the appeal.
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Lenders ready for burst in remortgage activity
Mortgage lenders know that the first base rate rise will be the trigger for many existing mortgage holders to remortgage. Those on variable deals are likely to seriously consider fixing to shelter from further increases.
Lenders are keen to secure this business now. Some are keen to keep their existing customers and so offer them special deals. Nationwide, for example, offers 'Loyalty Rate Mortgages' where existing customers transferring to a new product with Nationwide get a 0.1% discount on new customer rates.
And all lenders are keen to lure customers from the competition with many making more rate changes in in recent months than they have done in the past few years.
Alongside falling fixed rates, product choice is on the rise, another indication of the importance lenders are putting on retaining customers. According to Moneyfacts, the number of fixed rate mortgages on offer has risen by 297 since September, while in the variable market, products have only risen by 10 – indicating that lenders are reluctant to launch mortgages that don't lock borrowers in.
What are the best buy fixes?
The best fixed rate mortgages are available to borrowers with a bigger deposit or more equity in their property. The lower the loan-to-value (LTV) you need to borrow, the less you’ll pay.
For example, HSBC is offering a two-year fix at 1.49% up to 60% LTV and with a £1,999 fee (call 0808 115 8734 for more information).
Nationwide has introduced some competitive 10-year fixed rate mortgages starting at 3.49% at 70% LTV, with a £999 fee.
Nationwide is also offering its lowest ever two-year fixed rate deal. New borrowers can fix at 1.84%, and existing customers 1.74%, at 60% LTV with a £999 fee.
For five-year fixed rates, Accord (a broker-only lender) has a rate of 2.59% and a fee of £845 on a maximum LTV of 65%. Woolwich is offering a rate of 2.75% for five years at the same LTV and with a £1,999 fee.
When comparing mortgage deals it’s important to work out the total cost including both rate and fees.
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